House prices are close to affordable levels, reveals survey

House prices are already "fair value" and are fast approaching "affordable" levels, according to research commissioned by The Daily Telegraph.

House prices close to affordable level: The Daily Telegraph/Lombard Street Research Housing Affordability Index shows that houses have become significantly less overvalued.Photo: PA

By Edmund Conway

10:20PM BST 19 Oct 2008

The Daily Telegraph/Lombard Street Research Housing Affordability Index shows that houses have become significantly less overvalued in recent months.

However, households should not expect prices to bounce back as fast as they did in the past, the economic consultancy warned.

The news may reassure homeowners, since a growing number of economists had predicted that prices would drop by as much as 30pc or 40pc in the coming years. In fact, Diana Choyleva, director of Lombard Street Research, said prices were unlikely to fall much more than 20pc, and should stop falling by mid to late next year.

"We think that house prices could bottom out mid to late next year," she said. "However, it's going to be a prolonged adjustment – even after prices hit the trough they won't recover swiftly or decisively, they will languish at the bottom. It all hinges on how the Government will use its quiet control of the banks."

As part of its semi-nationalisation of UK banks, the Treasury has agreed that the financial institutions will increase their lending levels to their 2007 pre-crunch levels. However, economists are sceptical about whether such an aspiration can really be fulfilled.

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The affordability index, in which 100 points represents the average affordability level since the early 1960s and a lower figure means prices are more overvalued, improved from 88.9 points to 93 points. Since reaching a 16-year low affordability level of just under 83 points last year, at the peak of the housing boom, it has improved by around 10pc.

Importantly, the index takes into account the cost of mortgages as well as households' disposable incomes, so it reflects the fact that families' costs have increased as a result of the credit crunch.

Ms Choyleva said: "The affordability indicator has improved. This is an entirely different situation to the early 1990s. It never hit the same high levels of unaffordability."

Almost all City economists now expect the UK to suffer a recession in the coming 12 months, with some anticipating as sharp a slowdown as experienced in the early 1990s. The Office for National Statistics reported last week that unemployment is rising at the fastest rate since 1991, climbing to 1.8m, or 5.7pc of the working age population.

But Ms Choyleva said many employees are cutting their costs by reducing wages rather than staff numbers. She said: "We expect a fairly significant correction which would involve a recession and 0-0.5pc growth next year, but then in 2010 things should improve.

"Unemployment is unlikely to reach the rates it hit in the early 1990s. So there is less potential for forced sales than there was in the early 1990s."